2012 (2) TMI 406 - AT - Income Tax

Shrink-wrap software payments held sale of goods, not royalty under s. 9(1)(vi) and Art. 12(3); business income untaxed

ITAT held that payments received from Indian resellers for shrink-wrap software constituted consideration for sale of copyrighted articles, not 'royalty' ... TDS - payment received from resellers on sale of shrink wrap software - nature of ‘Royalty’ which is liable for taxation in India within the meaning of Article 12(3) of the Indo-US DTAA - No Permanent Establishment(PE) - Held That:- In view of DIT Vs. Ericsson AB, [2011 (12) TMI 91 - DELHI HIGH COURT] held that 'The Tribunal after referring to definition of Royalty under the Act and the definition copyright under the Copyright Act, 1957 held that what was sold by the non resident was a copyrighted article and payment to the non resident was not for copyright. On further appeal by the Revenue, the Hon’ble Delhi High Court examined the issue which we have set out earlier. The Hon’ble Delhi High Court held that income did not accrue to the non-resident by virtue of a business connection in India and therefore the question of the Non resident having a permanent establishment in India did not arise for consideration at all. - hold that payment received by the assessee was towards the title and GSM system of which software was an inseparable parts incapable of independent use and it was a contract for supply of goods. Therefore, no part of the payment therefore can be classified as payment towards royalty.' consideration received by the Assessee for software was not royalty. The receipts would constitute business receipts in the hands of the Assessee. Admittedly the Assessee who is a non resident does not have a permanent establishment and therefore business income of the Assessee cannot be taxed in India in the absence of a permanent establishment. Decided in favour of revenue. Issues Involved:1. Whether the payment received by the assessee from resellers on the sale of shrink-wrap software is in the nature of 'Royalty' under Article 12(3) of the Indo-US DTAA.2. Whether the assessee is liable to pay interest under section 234B of the Income-tax Act due to non-deduction of taxes at source.3. Whether the order of the CIT(A) should be set aside and the order of the Assessing Officer restored.Issue-wise Detailed Analysis:1. Nature of Payment for Shrink-wrap Software:The primary issue was whether the payment received by the assessee for the sale of shrink-wrap software constitutes 'Royalty' under Article 12(3) of the Indo-US DTAA. The Tribunal noted that the facts of the case were identical to earlier years (AY 03-04 and 05-06), where it was determined that sums received for software supply were not 'Royalty' but business income. The assessee, a US-based company, developed and marketed 3D mechanical design software called 'Solidworks 2003'. The software was sold to Indian customers through distributors under a non-exclusive distribution agreement, which did not transfer any copyright to the distributors or end users. The end user license agreement (EULA) restricted users from modifying, reverse engineering, or redistributing the software. The Tribunal cited the Supreme Court's decision in Tata Consultancy Services Pvt. Ltd. Vs. State of Andhra Pradesh, which held that software on a medium becomes goods and is subject to sales tax, not intellectual property transfer. The Tribunal concluded that the payment for the software was not for the right to use the copyright but for a copyrighted article, thus not constituting 'Royalty'.2. Liability under Section 234B of the Income-tax Act:The Tribunal also addressed whether the assessee was liable to pay interest under section 234B due to non-deduction of taxes at source. The CIT(A) had held that since taxes are to be deducted at source, the assessee is not liable to pay interest under section 234B. The Tribunal upheld this view, aligning with the earlier decision that the payment received was business income and not royalty, and thus, the assessee was not liable for interest under section 234B.3. Appeal Against CIT(A)'s Order:The Revenue's appeal sought to set aside the CIT(A)'s order and restore the Assessing Officer's decision, which had classified the payments as 'Royalty'. The Tribunal referred to the Hon'ble Delhi High Court's decision in Director of Income Tax Vs. Ericsson A.B., which held that payments for software that is part of hardware are not royalties but payments for copyrighted articles. The Tribunal also considered the Hon'ble Karnataka High Court's decision in CIT Vs. Samsung Electronics Co. Ltd., which held that payments for software licenses are royalties. However, the Tribunal preferred the Delhi High Court's view, which was favorable to the assessee, stating that when two views are available, the one favorable to the assessee should be adopted. Additionally, Article 24 of the Indo-US DTAA, which provides for non-discrimination, supports this approach.Conclusion:The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order that the payments received by the assessee were not in the nature of 'Royalty' and thus not taxable in India. Consequently, the assessee was not liable for interest under section 234B. The Tribunal's decision was pronounced in the open court on February 8, 2012.